Vanguard ETFs start with a bang

On Tuesday, just as a renewed controversy erupted over Canada’s sky-high mutual fund fees, the world’s cost leader in index mutual funds and exchange-traded funds commenced trading of its first six ETFs on the Toronto Stock Exchange

It’s a classic case of what British journalist Malcolm Muggeridge used to term “fearful symmetry.”

On Tuesday, just as a renewed controversy erupted over Canada’s sky-high mutual fund fees, the world’s cost leader in index mutual funds and exchange-traded funds commenced trading of its first six ETFs on the Toronto Stock Exchange. Vanguard Canada had already announced its imminent arrival in the summer but only now can Canadians buy its ETFs specifically tailored for the Canadian market.

Sales in the first two days were $40-million, says Vanguard managing director Atul Tiwari, who addressed advisors in Toronto. But the number that should really put the fear of God into the $773-billion domestic mutual fund industry is 0.09%. That’s the management fee of the new Vanguard MSCI Canada Index ETF (VCE/TSX) — an astonishing 30 times lower than the 2.70% MER of some Canadian equity funds.

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Talk about the juxtaposition of the ridiculous and sublime. Tiwari told securities-licensed advisors that the first six “core” ETFs sport average MERs of 0.24%, compared to 2.04% for average mutual funds in Canada and 0.88% for rival ETFs.

The question is whether the so-called Vanguard Effect will take place in Canada as it has in other markets. Mr. Tiwari referenced this, noting that when it entered foreign markets like the U.K. and Australia, local fund companies started dropping fees in anticipation.

Given Canada’s mutual fund fees are higher than most places, and roughly twice as high as those in Vanguard’s home turf in the United States, you might expect a pronounced Vanguard Effect here. Thus far, however, there’s little evidence the big local fund companies have dropped their fees.

“I don’t know that it will follow exactly the same way in Canada but when you have a big competitor competing on cost there has to be some downward pull on fees,” says fund analyst Dan Hallett. There may be a secondary impact on mutual fund fees but those immediately affected may be other local ETF makers: notably Black Rock Canada’s iShares, which still has dominant (more than half) market share, or the ETF units of Canadian banks BMO and RBC.

In truth, the banks have dodged a bullet since every bank no-load group sells index mutual funds that are relatively costly vis-a-vis ETFs or Vanguard’s index funds in the United States.

Index mutual funds in Canada have an average MER of 1.14%, on the high side for passive investments. Fortunately for the banks, Vanguard has not yet entered that market, preferring to focus on ETFs.

The reason they haven’t, Tiwari told me in an interview, is that distribution is problematic.

The elite gathering of advisors who attended the event seemed enthused that the world’s cost leader had finally begun to sell its products here.

The comparable iShares S&P/TSX 60 Index Fund (XIU/TSX), is at 0.17%, still a bargain against any Canadian equity mutual fund. Vanguard Canada’s new MSCI US Broad Market ETF (VUS/TSX) and MSCI EAFE Index ETF (VEF/TSX) are both hedged back into Canadian dollars, sporting fees of 0.15% and 0.37% respectively.

The Vanguard MSCI Emerging Markets ETF (VEE/TSX) is not currency hedged and has a fee of 0.49%. It competes against a higher-cost version sold by rival Claymore: it’s the same Vanguard fund but Claymore’s is hedged.

Two domestic bond ETFs designed for Canadian investors charge 0.20% for the broad bond market (VAB/TSX) and 0.15% for short-term bonds (VSB/TSX).